Zero-risk Entrepreneurship

It’s been three weeks since I quit my industry job and ventured out on my own. When I talk to folks about it, I often get a congratulations, followed by this:

“Wow, that takes a lot of courage. I’m not risky, and I could never do that. But, it’s great that you are.”

At first, it sounds nice. Who doesn’t want to believe that they are risky and courageous?

But on second thought, I’m not sure that it’s true.

When I think of courage, I think of people taking risks that involve a real downside. I think of soldiers risking their lives. I think of the firefighters on 9/11. I think of the Harriet Tubmans, the Nelson Mandelas, and the Ghandis.

I do not think of people quitting their job to try their own thing.

As far as I can tell, there is no real downside to giving the entrepreneur career a try. The biggest downside is a temporary lull in cash flow. The closest thing to courage is the willingness to deal with fears we may have related to entrepreneurship. This may only be the case for me, but I have to believe that it extends to many others.

Firefighters at work on 9/11: something much closer to real courage.

The biggest perceived downside: loss of cash flow and savings.

If you are thinking about leaving your job to be an entrepreneur, you are definitely leaving money on the table. This includes a stable salary, future bonuses, vested stock options, etc. You will also bleed from your savings for a while.

Is this really a big loss?

On one hand, yes. It’s definitely a loss of real money. And potentially, a lot of real money. On the other hand, it’s not that much of a loss. As long as you have enough money to sustain your life, and provide yourself some runway, what else do you need?

The problem is that most people look at this loss, and think of financial insecurity. Yes, putting oneself in a place of financial insecurity can be pretty risky. But becoming an entrepreneur does not mean that you are automatically broke, with no means of making money.

I believe there is only one important question for would-be entrepreneurs:

Can you get another comparable job?

If the answer is “yes”, then you are all set. Just get another job before you become financially unstable. My bet, is that your answer is “yes”. First, you have already have a job. Chances are that you can get another. Second, if you are serious about entrepreneurship, you can probably get stuff done. Companies hire people who get stuff done.

And on bleeding from your savings: you probably don’t need as much money as you think. It is quite easy to lower your burn rate. Move in with your parents, or move to an apartment with lower rent. Cook instead of eat out. Make coffee instead of go to Starbucks. It is surprising how much you can lower monthly costs just by making it a priority.

Investing in yourself.

Here is a better way to think about the loss in cash flow.

Many startups, especially in web and mobile, don’t need much for seed funding. Seed-stage incubators/accelerators, such as Y-Combinator and TechStars, give startups about 18K. The 18K is only meant for a few months, but it is enough to get started. It isn’t uncommon for startups to start with seed money in the tens of thousands.

How many folks in the tech industry have more than that in the bank account? Or in various investments? How much money is in their in their 401K plans?

Instead of thinking about the loss in cash flow, think about it as an investment in yourself. If you work hard, the investment will easily pay itself off: if not in startup success, than in skills/experience/network acquired.

Some sort of courage required.

If there is courage in entrepreneurship, it is in recognizing and dealing with the fears built into human psychology.

Fear of change. Psychologist Fritz Riemann postulated a pair of conflicting needs that manifest as the fear of change, and the fear of constancy. Everyone has both of these fears to some degree, but for some, one of these dominates the other. For those where the fear of change dominates, the drastic change in career/lifestyle change involved in becoming an entrepreneur can be scary.

Fear of loss. Kahneman and Tversky found that people do not equally weigh loss and gain. The feeling of loss is much stronger. People would rather not deal with potential losses, leading to risk aversion. This also contributes to the sunk cost fallacy. Once people are invested along one path, they are hesitant about switching paths when it involves losing the currently invested costs. The fear of loss makes it harder to leave your current job, your steady paycheck, and your comfortable lifestyle. As a side note, it also helps makes Farmville addictive.

Another pair of fears: the fear of failure, and the fear of success. The fear of failure is pretty straightforward. What if we are not good enough? What if we give it our, all and still fail? It can be easier to cut our losses, and just not try. The fear of success is related. What if we succeed, but aren’t happy? What if we got lucky, and can’t ever repeat the success? Shooting for success, and then actually reaching our goals, can be scary.

Again, none of these are true problems. They only require the courage to play mind games with ourselves, and deal with the fears that are hardwired into our brains. We need to accept that there will be a large change in our lives, that there will be short-term losses for almost-certain long-term gains, that will will live in a period of uncertainty, and that we will will be alright whether our business succeeds or fails.

Entrepreneurship and skydiving.

People like to make the analogy between entrepreneurship and skydiving. Most emphasize the risk involved in both activities.

I agree with the analogy, but not for the same reason.

Entrepreneurship and skydiving are similar because they are safe activities that are perceived as risky. Similar to entrepreneurship, there is no real downside to skydiving. No one skydives without two parachutes: the main parachute, and a reserve parachute. It is highly unlikely for anyone to die skydiving. What we really deal with is our fears associated with skydiving (e.g. fear of heights). If we can deal with those fears, it’s all good.

I recently went tandem skydiving for the first time at a good friend’s bachelor party (literally taking the plunge before taking the plunge!). The anticipation while waiting on the ground was scary. The flight up was even scarier. We were packed like sardines in a little plane. The side door was open the whole time. The ground kept getting further and further away. I would have been scared jumping out, but was pushed out by the instructor before I could think. After that point, there was no more fear. It didn’t feel like falling because we instantly hit terminal velocity. It was exhilarating for about a minute. Then, the instructor pulled the chute, and I enjoyed the view while safely gliding on down to Earth.

So to those would-be entrepreneurs, there is zero risk. Prepare your chutes, take the plunge, enjoy the exhilaration, and know that you will be safe no matter what the outcome.